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TEMPUS

A low-carbon road paved with gold

Inside The Foundry Of Weir Minerals Europe Ltd.
A worker pours molten metal into casts for the manufacturing of parts of centrifugal pumps at Weir Minerals Europe, a division of Weir Group
MATTHEW LLOYD/BLOONMBERG VIA GETTY IMAGES

The old adage suggests that in a gold rush you should back the company selling the shovels. The same could be as true today as it was in 19th-century California and the Klondike.

Thus, while automotive and technology firms seem obvious picks when talking about the transition to a low-carbon economy, miners and their suppliers also look set to benefit. Rising demand for electric vehicles and batteries will drive soaring demand for commodities such as copper and cobalt.

Weir Group, the Glasgow engineer and manufacturer that makes and replaces valves, pumps, grinders and centrifuges for heavy industry worldwide, believes it’s in a good position to ride any zero-carbon mining boom. So much so, in fact, that last week it hoisted a “for sale” sign on its oil and gas division, another step on its road to becoming a pure-play minerals business.

Jon Stanton, who took over as chief executive towards the end of 2016, has already offloaded Weir’s flow control division and sees the move out of oil and gas as a “natural step”. The volatility in the sector, particularly in North American shale basins where Weir has a big exposure, led to the group issuing a profit warning in November. Mr Stanton did point out, however, that the process to sell may take some time and that he would not be rushed.

He is an experienced dealmaker. The 53-year-old led the near-£1 billion acquisition of Esco Corporation in 2018; the American company’s main business is making mining equipment. The enlarged minerals division delivered £2.1 billion of the group’s £2.7 billion revenue in 2019, as well as 90 per cent of the £352 million operating profit.

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Investors certainly seem to like the idea of focusing on minerals. Weir’s share price rose 11 per cent when the strategic changed was announced. Shore Capital analysts said that without oil and gas Weir was “a much more stable [and] resilient business, with higher operating margins and earnings quality” as it upgraded its rating on the stock from “sell” to “hold”.

The wider market sell-off in recent days has reversed some of the share price gains and at at £12.77, down 28½p, or 2.2 per cent, yesterday, the stock is not far from the lowest it has been since the middle of 2016.

With minerals the dominant division in terms of providing profit and cashflow, Weir’s dividend would not appear to be at risk when it does sell oil and gas. Shareholders will get 46.95p per share for 2019 and, with cover of 1.9 times, a modest rise in 2020 is on the cards. Although the company is not setting a timescale on the disposal, analysts believe that the oil and gas division will fetch upwards of £400 million and expect bidders to begin circling soon. A note from Jefferies said: “Markets are tough, but it’s a strong business in its chosen field.”

Consensus forecasts for Weir in 2020 have pencilled in £2.8 billion revenue, a £283 million pre-tax profit and a 50.4p dividend. Profit margins at Esco and minerals are predicted to be between 16 per cent and 18 per cent, while in oil and gas the figure is 6 per cent.

Mr Stanton — who expects solid growth this year, as long as the coronavirus does not have too heavy an impact on customers — believes that Weir’s technology can help miners to improve their emissions and their environmental sustainability. With giants such as BHP and Rio Tinto pledging to reach net zero emissions by 2050, the opportunity to provide greener equipment opens up a further frontier for Weir to exploit.

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Advice Buy
Why
The shares are relatively cheap at the moment, the dividend looks solid and there are some encouraging tailwinds in mining

Unite Group

Real estate investment trusts underperformed the stock market during last week’s market sell-off. The sector fell by 11.3 per cent, compared with 11.1 per cent for equities in general, according to Numis Securities.

Within that, however, some players fared even worse. Unite Group, Britain’s largest provider of student housing, fell by 15 per cent, despite reporting a strong set of annual results. The cause? Investors’ worries about the potential impact of coronavirus.

Unite controls 74,000 beds in 27 cities and its property portfolio is valued at £5.2 billion. Its shares are 22.7 per cent higher than they were a year ago in response to its £1.4 billion acquisition of Liberty Living, a rivals. Like-for-like rental growth in 2019 was up 3.4 per cent on the year, an improvement on the previous year’s 3.2 per cent growth.

Yet the coronavirus outbreak looms large. Chinese students make up about 13 per cent of its student numbers, although 50 per cent of those are already in the UK. Nonetheless, the company is predicting further rental growth of between 3 per cent and 3.5 per cent next year, thanks to a combination of price increases and asset management. Any impact of covid-19 on student numbers should be offset by supportive government policies for attracting overseas students and a recovery in Britain’s 18-year-old population.

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A record-breaking deal last week demonstrated the scale of market demand for student housing. Blackstone agreed to buy the iQ student housing company from Goldman Sachs, the investment bank, and the Wellcome Trust, the research charity, for £4.7 billion in what will be the largest UK private real estate deal on record when it is completed. That deal implies there’s room for further growth in the value of Unite’s portfolio. The shares are up 7.4 per cent to £11.08 since Tempus recommended buying them in August 2019. The recent share price fall (they dipped 25p, or 2.2 per cent, yesterday) represents an opportunity to access a well-run operator in a market supported by strong fundamentals that should deliver sustainable earnings growth.

Advice Buy
Why
Share price fall defies earnings growth potential

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